Lending money to own business

If you're a beginner to all this, it's very likely that incorporating is going to be much too complicated. Starting an unincorporated business (also known as being a sole trader or self employed) is more straightforward. But if you need the protection of limited liability, then incorporation is probably unavoidable.

A sole trading business has no separate identity from its owner, and so lending money to the business would be like lending money to yourself. It doesn't make sense. Any money you put into (this is called "introducing capital") or take out of (this is called "drawings") the business has no tax implication. You get taxed on profit which the business makes (whether or not you draw the money out).

If you do incorporate, your business has its own identity. You can indeed then lend money to it, and can pretty well charge whatever rate of interest you like, but of course you personally would pay income tax on interest you earn. If it's a one-person company, it may well in some circumstances be better to suck profit out of the company this way than as dividends. It's also easier to take the capital back out - that would just be repaying a loan which has no tax implication.

For small limited companies, this is the most common way of funding them. For a sole trader, you can call your funding what you like, it makes no difference. Usually owners don't charge any interest on their loans to the company. Sometimes there might be tax advantages in doing so, if your personal tax rate on bank interest is lower than the company's corporation tax rate. Then you could justify an interest charge that is similar to what a bank would charge the company. The best way depends on the tax positions of you and the company.

Remember however that you have to declare the interest on your self assessment.

A thought: if you are married, and your wife is not paying tax, you could gift the money to her and she could lend it to the company and the interest would go on her income tax assessment not yours.

Robert

In article , Alan Ferris writes

I have been wondering if this is in some way avoidable.

If you borrow money as an individual (to obtain a beneficial rate) then loan it to your (or someone else's) company can you pass on the interest paid by yourself as an expense as 'Cost of Borrowing', an absolute amount, rather than 'interest, x%' ?

The foregoing scenario pre-supposed that the money was yours to lend and had not first been borrowed from elsewhere, so no, there it is not avoidable.

Yes, if you borrow money from somewhere at, say, 5%, and then lend it to your business at 6%, you would declare only the 1% as interest received. Of course if you lent it to your business at the same rate as that at which you borrowed, you would have nothing to declare.

In both cases, of course, the interest paid by the business to you, be it 6% or 5%, would be an allowable expense in the business's accounts.

On what grounds are you allowing the %5 interest he is paying? He is not in the business of lending money.

Of course he is, or would be, if acting as a go-between between a bank and his company *to which he is lending money*. The bottom line is that he would not (personally) be profiting from the deal except to the tune of 1%, and accordingly he should not expect to pay income tax on

How would you show this on the return. HMRC would see the income from the company, where would you show the expense?

If you borrow money to finance your own business, you can claim that as an expense in your tax return.

Thanks

Yes, but that's for an unincorporated business, and you claim it in box

Where the business is incorporated, though, it gets a bit more complicated.

HMRC would see the income as a result of your showing it in box 10.14. The expense would, I suggest, go in box 15.1.

Alternatively I would be inclined, unless the amounts involved are too significant to gloss over, to show in 10.14 only the income net of expense.

If the excess is nil, i.e. if the individual is lending the cash to the company at the same rate of interest as that at which he's personally borrowing from the bank, I would not show it in the tax return at all.

Cheers Ronald, just wanted to follow your reasoning on this.

If you just wanted to know whether I was talking through my arse, then I don't think you're any the wiser now.

No I was seriously wondering how you would account for this on a return as I have never seen it.

But if you wish to act the ass, as you have done, feel free.